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Passive investments now available in adviser-sold 529 plans

Giving investors and advisers to 'make a trade-off between the lower-cost option or the opportunity' from actively managed portfolios

Advisers have a new, cheaper portfolio option for clients who invest in Rhode Island's $7 billion college savings plan.

Starting Monday, the adviser-sold Section 529 college savings plan CollegeBoundFund offers an age-based investment that tracks Morningstar Inc.'s 529 College Savings Moderate Index. This is one of few passively managed options in a college plan sold through advisers.

“It allows investors and advisers to make a trade-off between the lower-cost option or the opportunity that can come from the actively managed portfolio,” said Vadim Zlotnikov, co-head of multiasset solutions for AllianceBernstein, which manages the 529 plan.

He said the new passive option will be 27 to 38 basis points cheaper than the actively managed alternative. An adviser will have to weigh the price difference against his or her confidence level that the actively managed portfolios can deliver superior returns, he said.

One notable feature of actively managed portfolios is that they account for market volatility during the final years before a student needs the money for college, while the passive investment doesn't include such volatility management, Mr. Zlotnikov said.

CollegeBoundFund is the first 529 plan to have an investment that tracks the Morningstar index series, which was introduced at the end of last year.

At that time, Morningstar introduced three glide path indexes: aggressive, moderate and conservative. All three seek to be a type of yardstick for comparing 529 plan performance with independent measures.

“Each index underlying the 529 index series provides diversified asset-class exposure to global equities, bonds, Treasury inflation-protected securities and cash by using existing Morningstar indexes as asset allocation building blocks,” Sanjay Arya, head of Morningstar Indexes, said in a statement Monday.